Suppose the target exchange rate set by the Fed is 150 yen per dollar.If the demand for dollars permanently decreases the Fed

Question

Quizplus · Accepted Answer

If the demand for dollars permanently decreases, the Fed cannot permanently maintain the target exchange rate of 150 yen per dollar because the market forces of supply and demand in the foreign exchange market would push the exchange rate away from the target rate. The Fed could intervene temporarily by buying dollars to push the exchange rate towards the target, but this would not be sustainable in the long run. Therefore, the Fed cannot permanently meet the target by buying or selling dollars, and violating interest rate parity and purchasing power parity would not be a viable solution.

Suppose the Target Exchange Rate Set by the Fed Is